How trucking companies are born

Dmitriy Bocharov
Aug 9, 2017 · 6 min read

Today we are going to look into the process of launching of a regular trucking company in the US, and how this process leads to the current market situation in this field. Trucking marketplace is huge; however, there are only a few large companies present as 92% of the market are businesses with 6 and less trucks.

What prevents trucking companies’ owners from growing their business? What are the pitfalls that they encounter? Why do only 8 out 100 owners pass the 6 trucks threshold?

Let’s look into this process step by step, and probably, then, we will be able to understand the logics behind these figures.

So, most of the potential trucking company owners are either drivers or dispatchers, i.e. the insiders who are familiar with the industry. Both these jobs presuppose the understanding of the structure and peculiarities of the market, and their knowledge of the mathematics is enough to estimate the potential profit related to the increased number of trucks in the company.

Stage 1 (Why not to get another truck?)

The desire to add another truck and to hire a driver is common for many truck drivers. They see the others who have already done this; they hear their impressions and, if they are not afraid of the risks, they purchase the second truck. The driver who is supposed to drive this next truck is usually a relative or a beginning driver. At that point, most of them think that one just needs to teach the new driver to start getting the desired profit needed to pay off the loan for the truck.

Here is how the initial profit is estimated by 2 trucks’ owner:

The profit is compiled of the first driver’s profit plus the second driver’s profit minus the second driver’s wage.

Here is the approximate estimate of the monthly profit:

Monthly revenue for an average truck is about $22,000 of which:

$2000 (10%) — dispatcher

Approx. $1.8/mile will make it about 12,500 miles/month;

Fuel for 12,500 miles + “empty” miles = 14,000 miles = $6,000

Insurance — $1,000

Other expenses (minor issues, weight stations, maintenance, etc.) — $2,500

After all the above, the gross profit (before taxes) is approx. 25–40% of the revenue.

An important remark: we are talking about an average month without any serious technical issues which can significantly increase the expenses. Besides the costs for the repairs, the truck is not in service which means it is not gaining any profit at that time, and these costs can be very big.

Each truck driver in the US understands that one needs to drive a lot to make money in this business. This is a hard job which does not suit everyone.

So, let’s look at what happens to a business owner after the purchase of the second truck. In general, if this truck pays off and does not add on the expenses, it can be considered profitable. If there are no technical issues, and the hired driver drives a lot, the profit from this additional truck can reach $2,000-$5,000/month.

With the average mileage of 14,000 miles/month and the wage of $0.47–0.52/mile (“empty” miles included), the second driver can end up with a salary of $6,000/month.

A company owned by a dispatcher has additional savings of 10% as they do not have to outsource dispatchers. This type of business ownership also presupposes that other truck owners will use the services of this dispatcher; thus, the business model is a little different here.

A dispatcher who is planning on starting their own company tries to increase the number of trucks which they dispatch. A driver who purchases a truck usually drives it himself until the moment when the profit is more than the required minimum to keep the business afloat.

In this article we are mostly talking about those companies which were started by drivers, for those represent the majority.

Stage 2 (A driver becomes a dispatcher)

When a truck business owner purchases more trucks, there comes a moment when the company management requires more time and control, and the owner needs to switch from a driver to a dispatcher for their trucks.

There are several reasons for that:

  • Economic gain is more as there is a 10% saving for the dispatcher services;
  • Better control over other drivers
  • No possibility to hire an extra employee to fulfill these managerial tasks due to yet low profit;
  • Desire to grow professionally by switching to the office style of work.

Sometimes a close relative might become a dispatcher; however, it is not very common.

The above described situation usually happens when the third or fourth truck is purchased by one owner. Due to the increased amount of issues one needs to deal with at this point, there usually happens a significant change in the algorithms of company’s operation.

Stage 3 (X Factor)

As the company reaches 5–6 trucks, there comes a very difficult and crucial moment where a lot depends on how it is handled. This is a stage of delegation of authority and deputation of the hired dispatchers. Many issues might arise which could significantly slow down the pace of the company’s development.

Should one invest in the training of new dispatchers, who might be a cheaper work force, but without any guarantee for long-term commitment?

Or, should one hire an experienced and more expensive dispatcher, and how to keep him committed?

And, should one allow the hired dispatchers to continue dispatch their other trucks, assuming it might deprive one of better deals?

How long will it take for a new dispatcher to become profitable?

How to motivate them to strive for better deals and to negotiate better prices with the brokers?

How to control their work and avoid mistakes?

These and other questions are natural to arise at this point with any growing truck company.

A company with 5–6 trucks is at the most vulnerable stage as there is not much profit yet, but the technical issues arise more often now, and there are more salaries to pay. The profit might be even lower here than when the owner was a dispatcher.

Another factor comes into play now — a psychological one. At this point, a smart business owner might reach some sort of financial well-being in the US. Stable income of $15,000–20,000/monthly allows to pay all the bills and life necessities of all kinds, and provides new opportunities for savings without active investing. Risk levels tend to lower, and the company’s owner strives to stabilize the achieved profit rather than increase the amount of trucks and the work load.

There are some business owners who are capable of running and dispatching a company of 10, 15, and even 20 trucks. However, it is more of an exception to the rule, which is the result of the scheduled workload coming from just one broker.

This “X Factor” serves a good ground for the fact that still the majority of truck companies in the US (92+%) own 6 or less trucks.

However, there are many (69,000 out of 1,480,000) companies which overpassed this threshold of 6–10 trucks and managed to build the effective system of operation within their companies with outsourced dispatchers.

Stage 4 (Business as it is)

If a truck business owner continues to add more trucks, at some point in the nearest future, there are 2–3 dispatchers working for them, and the company functions effectively at all levels, e.g. management, supervision, bookkeeping, etc. After 20–30 trucks there comes a moment when a company becomes a regular business, not unique anymore. The owner steps away from the operational tasks, and is more concerned now about control of the work load, efficiency, reports, and financial aspects. This change in the owner’s attitude is crucial. They transform from a risk-taker to a regular manager. And the more this newly transformed manager takes over the new tasks on the course of the company’s development, the more effectively the company is growing. Now is the time of acknowledging the achievements, analyzing the data, long-term contracts, and maintaining the company’s image. How to keep the drivers and dispatchers committed? Where to get more interesting deals? How to optimize the expenses, automate the processes, and to keep the mileage wages high? These are the questions to consider at this stage. Now, the company is not defined solely by the efficiency of its owner, but by his effectiveness as a manager. This is what is called real business.

What can one observe at the truck business marketplace right now?

Here’s some statistics:

There are 1,480,000 active companies
1–3 trucks — 1,137,000 companies
4–6 trucks — 125,000 companies
7–20 trucks — 88,000 companies
21+ trucks — 32,000 companies.

The above statistics is extracted from the author’s own database of the trucking businesses in the US.

Dimitry Bocharov
www.blockfactoring.com

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